How Is Your Credit Score?

Your credit score is not the only determinant of whether you qualify for a mortgage loan but it is an important one. Having a great credit score may also help you get better terms for your mortgage. However, many people are confused about how the credit score is determined.
FICO credit scores range between 300 and 850. Generally, a score of 620 is considered the minimum for obtaining a mortgage. The following factors affect your score:

1. Your payment history. Did you pay your credit obligations on time? At a minimum, mortgage lenders will look for perfect payment history over the last 12 months. Bankruptcy filing, foreclosures, liens, and collection activity also impact your history and your ability to qualify for a loan.

2. How much you owe. Owing money on credit accounts doesn’t necessarily mean you’re a high-risk borrower with a low FICO credit score. However, when a high percentage of a person’s available credit is being used, this can indicate that a person is overextended, and is more likely to make late or missed payments. Mortgage lenders will also look at the amount of your monthly debt obligation compared to your income as a qualifying factor for the loan.

3. The length of your credit history. In general, a longer credit history will increase your FICO Score. Your credit scoring will factor in the average age of your credit accounts and how long it has been since you used certain accounts.

4. How much new credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.

5. The types of credit you use. Generally, it is desirable to have more than one type of credit — installment loans, credit cards, and a mortgage, for example.

One note — mortgage lenders will look for you to have active credit lines in order to qualify for a mortgage loan. If you don’t have a credit card, car note or other line of credit being actively reported to the credit bureaus you won’t qualify for a mortgage. This is true even if you pay your bills on time.

Many people have had delinquent credit history in the past and have stayed away from establishing new credit. This often results in a lower credit score even though you now pay your bills on time. In order to raise your score, you need to replace the old bad history with good new payment history that is reported to the credit bureau.